Communications

In an illuminating article in the New York Times Paul Krugman presents an array of data from numerous sources that attempt to identify the present rate of inflation. As Krugman notes, two things are critical in reaching a conclusion about the rate of inflation:

• Distinction between month-to-month volatility and annual trends.
• Goods and services included and excluded in measuring price movements.

Measuring the inflation rate in today's economic environment is particularly difficult because it is neither very bad, as it was in the 1970s nor very good, as it was in the two decades leading up to the Great Recession in 2008. Everyone agrees about the good times and the bad times. But it's the times in between that throw off mixed messages.

The Federal Reserve uses the core market-based personal consumption expenditures index as its measuring stick. This measure strips out volatile food and energy prices but includes estimates of market-based housing costs. By this standard, inflation has fluctuated widely on a month-by-month basis over the past year, but the monthly and annual inflation rate was at roughly 2% - the Federal Reserve's target - by the end of April 2024. If so, the Federal Reserve's series of interest rate hikes over the past two years has finally paid off.

The New York Federal Reserve identifies the inflation rate at 2.8% at the end of April. A Goldman Sachs estimate puts it a bit lower at roughly 2%.

Krugman concludes, based on these various estimates, that core inflation at the end of April was between 2% and 3% and definitely declining.

If inflation is truly yesterday's problem, as Krugman contends, today's problem may well be a possible recession. If so, then Federal Reserve monetary policy should begin to reduce interest rates and do so quickly to preserve the prospects of a soft landing.

(As an aside, the 2% target rate finds its origins in an off-the-cuff remark at a New Zealand central bankers meeting in 1988. It was adopted by the Federal Reserve 24 years later in 2012, when Ben Bernanke was Chairman of the Board of Governors. The Federal Reserve offered no rationale for its 2% decision versus any other number, such as zero percent or 3%.)

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A report in the April 27th edition of The Economist addresses the issue of inflation morality, a somewhat strange topic. Recently published results from two surveys conducted by Stefanie Stantcheva at Harvard University found that the American public a) hates inflation, b) believes it contributes greatly to income inequality, c) is controlled by price-gouging corporations, and d) is immoral.

Capitalism may be alive and well in the U.S., but the American public does not buy into the notion that modest price increases are good for economic growth, job creation, and wage rates. By implication, in the opinion of those surveyed, the Federal Reserve's target rate of inflation should be zero and not 2% or any other positive number.

In addition, the surveys found a widespread belief that wage and salary increases are not influenced by Federal Reserve monetary policies or Congressional fiscal policies. Rather wage and salary increases are the rewards for those who earn them through individual performance.

The issue of morality dates back to a study of food riots in England in the 18th century by E.P. Thompson, a Marxist historian. As a result of his study, he concluded that capitalism was immoral. Supply and demand as the guiding force for all goods and services did not work. The solution was an economic transition in which producers limited their profits, only sold locally, and brought all goods and services to the local market at prices the public could afford.

Two takeaways seem to emerge from the Stantcheva surveys. One - mentioned above - is that the Federal Reserve set the target inflation rate at zero. The second is that corporations stop price-gouging and, therefore, preserve zero inflation. Who plays the role of corporate enforcer is unclear.

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In a recent commentary, The Economist stresses the importance of good followers to the effective performance of an organization. But in the process, it emphasizes the importance of good leaders in accepting and enabling good followers.

There are five generic categories of followers:

• Passive sheep.
• Yes men/women who enthusiastically carry out the boss's most trivial wish but never think for themselves.
• Alienated followers who think for themselves but are primarily concerned with criticizing the organization's stupidity and failures.
• Alienated followers who think for themselves, get on board, but rarely take initiative to change anything.
• Star followers who see themselves as leaders in waiting.

The good leader excludes the first four types of followers and relies on the stars to openly question and review his or her decisions and policies. The organization, therefore, benefits from the collective input of active minds and active aspirations for improved company performance, which may then allow leaders in waiting to move up the ladder.

Putting things in perspective, everyone in an organization is a follower since everyone has a boss, with a possible exception of one or two people at the very top.

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As Head of Development and Growth for Shockproof! Training, David manages all new product and marketing initiatives.

David has spent more than 30 years as an observer and practitioner in the fields of banking and economics. After graduating from UC Berkeley, he entered a PhD program in political economics at Stanford to study international trade and finance. Along the way, he earned master's degrees in engineering and political science before being lured by the technology wave sweeping over Stanford and Silicon Valley.

He began his career in finance as a research analyst at Volpe Brown Whelan where he focused on software and professional service firms. He covered these sectors when he subsequently worked at Prudential Securities and Credit Suisse.

After leaving the banking world in 2001, he ran a global investment fund that generated an average 16.5% net annual return over a 5-year period. In 2007 he founded RepairPal, the leading consumer source of price discovery for automotive repair services, and he received a US patent for the algorithm underlying this technology.

More recently, he's started and worked with an array of companies in the commercial lighting, automotive software, and services industries.

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